YTRA - Yatra: A Fundamental And Tactical Play

2023-09-21 13:08:06 ET

Summary

• Yatra is a leading online travel company in India offering a play on the fast-growing Indian tourism industry.
• Its operational performance has improved substantially post the COVID shock and has been operationally profitable driven by increasing take rates and strict cost control.
• Its closing of India IPO at a price band which is significantly higher than the ADR price provides an arbitrage opportunity for ADR investors.

Investment Thesis

Yatra (YTRA) is among the leading online travel company within India with a strong brand image. It offers an opportunity to invest in a burgeoning Indian tourism and travel industry which is the fastest growing economy in the world. Its performance has significantly improved over the time and the company has been operationally profitable driven by increasing take rate and strict cost controls. With the India IPO closed at a significant premium to its ADR shares, we believe it provides a significant arbitrage for the ADR investors along with relative undervaluation compared to MakeMyTrip (MMYT). We initiate with a Strong Buy with target price of $3.5.

Company Background

Yatra is the third-largest online travel company in terms of gross booking revenue and also a leading corporate travel service provider in India. It operates a common technology platform through its website, yatra.com along with associated mobile applications offering domestic and international air ticketing, rail ticketing, bus ticketing, cab bookings, hotels, homestays and other accommodations as well as holiday packages including visa facilitation, tours and events serving over 14 mn users. It has partnerships with over 800 large corporate customers as well as ~50k small and medium businesses along with a robust agent network of ~30k travel agents across 1,000 cities in India.

Burgeoning Tourism Demand

India is the fastest growing major economy in the world and expected to grow 6.0% - 6.5% according to estimates . According to WTTC , India ranks 6th largest nation among the G20 countries with tourism contribution to GDP of $178 bn driven by domestic market in 2021 and has recovered the fastest from its pre-pandemic levels compared to other countries.

WTTC forecasts the tourism and travel contribution to GDP for FY23 is expected to be just a shade below the 2019 levels driven by growth in both international and domestic visitor spends, double the rate of the country's GDP growth.

With the growing economy, airline travel has jumped significantly with international passengers growing 8% CAGR in FY14-19 period while domestic passengers grew at a record 23% CAGR during the same period. While COVID jolted the airline operations, the recovery has been swift with domestic passengers and international passengers for FY23 are at 78% and 82% respectively of the FY19 demand.

Indian Airline Passengers (in mn)

According to report from HVS , branded room supply within India's 3 key cities, Delhi, Mumbai and Bengaluru remains just 0.8-0.9x, significantly below compared to other major Asian cities (Singapore: 2.5x and Bangkok: 3.2x) prior to the pandemic. In addition, the hotel bookings have continue to grow strongly primarily driven by online bookings which grew about 15% during FY17-FY23 period compared to a mere 3% growth in offline share.

India Hotel Bookings by Channel

We believe an underpenetrated domestic tourism along with a continued recovery in the international visitors as well as growing number of international passengers would continue to bode well for the country's burgeoning tourism and travel industry.

Improving Performance from Yatra

Yatra has delivered a robust growth historically with total gross bookings growing at 28% CAGR (FY16-FY19) period driven by strong growth in both air bookings as well as hotel bookings. While COVID-19 jolted its operations leading to a substantial decline during FY20-FY21 period, growth has been strong in FY23 delivering 93% revenue growth YoY driven by market share gains and industry recovery, however, gross bookings still remains at ~60% of its 2019 levels underlining the significant potential for improvement. The company has focused on being profitable and has been steadily increasing its take rates with blended take rate for FY23 increasing to 9.1% compared to 7-8% range during the pre-pandemic period. It has been able to be profitable operationally driven by an improvement in its take rates and cost control measures.

Note: Total Gross bookings include B2B bookings

We believe the continued travel recovery would enable the company to leverage its leading position in the market and drive further growth.

Balance sheet position remains strong after the company closed the fresh issue of INR 6 bn (~US$74 mn) from the proceeds of its IPO in India along with existing cash balance of $13 mn with total debt outstanding of ~US$29 mn.

India IPO and Valuation

Yatra trades at 22x EV/ Fwd EBITDA compared to its counterpart MakeMyTrip which trades at 30x EV/ Fwd EBITDA.

It has now raised INR 8 bn (INR 6 bn in fresh issue and INR 2 bn as offer for sale from its selling shareholder) from its listing in India with the issue subscribed 1.6 times the total shares offered, at a market capitalization of ~US$270 mn, at a significant upside to its US listed ADR shares. Even if the stock lists at a hefty discount on Indian stock exchanges, that still calls for a substantial arbitrage gain. In addition, the funding will enable the company to continue invest in customer retention and growth of the business as well as pursue any inorganic opportunities and compete to grow its market share. We rate it as Strong Buy with target price of $3.5 (at 30x EV/ Fwd EBITDA, in line with its peer).

Risks to Rating

Risks to rating include

1) Its operations are heavily affected by the Indian economy industry and travel industry and any adverse impact on the same can lead to a substantial deterioration in its business

2) Its ability to charge higher take rates in Hotel and Packages bookings due to the fragmented nature of industry can be squeezed due to increasing competitive intensity from other large brands such as MakeMyTrip, ixigo and EaseMyTrip

3) Its inability to attract new customers or retain existing customers could lead to a decrease in ad conversion ratio and substantial decline in its operating profits

Conclusion

YTRA has been showing steady improvements driven by its robust performance in B2C business and its focus on profitability driving take rates higher. Its B2B business has also been robust and a highly fragmented corporate travel market enables them to leverage its strong brand positioning leading to over 98% customer retention ratio and steady increase in its corporate clients including several blue-chip companies such as KPMG, TCS, BCG and SAP. We believe the closing of India IPO provides the company with sufficient capital to grow its market share within the Indian travel industry and the pricing provides an arbitrage to the ADR investors. We initiate with a strong Buy with a target price of $3.5.

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